Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

AUDIT OF LIABILITIES
Accounting 152

PROBLEM NO.10
The following information relates to the pension plan for the
employees of S Company:
1/1/09 12/31/09 12/31/10
Accumulated benefit obligation P2 200 P2 300 000 P3 000
000 000
Projected benefit obligation 2 325 000 2 490 000 3 335 000
Fair value of plan assets 2 125 000 2 600 000 2 870 000
Unrecognized net(gain) or loss 0 (360 000) (400 000)
Settlement rate for the year 11% 11%
Expected rate of return for 8% 7%
the year
S estimates that the average remaining service life is 16 years.
S’s contribution was P315 000 in 2010 and benefits paid were P235
000.

45. The interest cost for 2010:

a. P224 100 c. P273 900
b. P253 000 d. P366 850

46. the actual return on plan assets in 2010 is:

a. P170 000 c. P245 000
b. P190 000 d. P270 000

47. the unexpected gain or loss on plan assets in 2010 is:

a. P16 400 loss c. P63 600 gain
b. P 8 000 gain d. P89 400 gain

48. the corridor for 2010 is:

a. P258 000 c. P282 500
b. P260 000 d. P333 500

49. the amount of unrecognized net gain amortized in 2010 is:

a. P6 375 c. P4 844
b. P6 250 d. P4 157

50. The auditor is most likely to verify accrued commissions

payable in conjunction with the
a. sales cutoff test
b. verification of contingent liabilities
c. review of post balance sheet date disbursements
d. examination of trade accounts payable

PROBLEM NO.8 LIABILITIES

The following information relates to the pension plan for the

employees of S Company:
1/1/09 12/31/09 12/31/10
Accumulated benefit obligation P2 200 P2 300 000 P3 000

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 000 000
Projected benefit obligation 2 325 000 2 490 000 3 335 000
Fair value of plan assets 2 125 000 2 600 000 2 870 000
Unrecognized net(gain) or loss 0 (360 000) (400 000)
Settlement rate for the year 11% 11%
Expected rate of return for 8% 7%
the year
S estimates that the average remaining service life is 16 years.
S’s contribution was P315 000 in 2010 and benefits paid were P235
000.

30. The interest cost for 2010:

a. P224 100 c. P273 900
b. P253 000 d. P366 850

31. the actual return on plan assets in 2010 is:

a. P170 000 c. P245 000
b. P190 000 d. P270 000

32. the unexpected gain or loss on plan assets in 2010 is:

a. P16 400 loss c. P63 600 gain
b. P 8 000 gain d. P89 400 gain

33. the corridor for 2010 is:

a. P258 000 c. P282 500
b. P260 000 d. P333 500

34. the amount of unrecognized net gain amortized in 2010 is:

a. P6 375 c. P4 844
b. P6 250 d. P4 157

PROBLEM NO.11 LIABILITIES

Star Records Company carries a wide variety of musical
instruments, sound reproduction equipment, recorded music, and
sheet music. To promote the sale of its products, Star Records
uses two promotion techniques – premiums and warranties.

PREMIUMS
The premium is offered on the recorded and sheet music. Customers
receive a coupon for each P12 spent on recorded music and sheet
music. Customers may exchange 300 coupons and P200 for a CD
player. Star Records pays P350 for each CD player and estimates
that 60% of the coupons given to customers will be redeemed. A
total of 8,000 CD players used in the premium program were
purchased during the year and there were 1,200,000 coupons
redeemed in 2010.

WARRANTIES
Musical instruments and sound reproduction equipment are sold
with a one-year warranty for replacement of parts and labor. The
estimated warranty cost, based on past experience, is 2% of
sales. Replacement parts and labor for warranty work totaled
P1,760,000 during 2010.

Star Records uses the accrual method to account for the warranty
and premium costs for financial reporting purposes. Star Records’
sales for 2010 totaled P74,000,000 – P56,000,000 from musical

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instruments and sound reproduction equipment and P18,000,000 from
recorded music and sheet music. The balances in the accounts
related to warranties and premiums on January 1, 2010, were as
shown below:
Inventory of premium CD players P
412,500
Estimated premium claims outstanding
458,000
Estimated liability from warranties
1,380,000

Based on the preceding information, determine the amounts that

will be shown on the 2010 financial statements for the following:
50. Warranty expense

a. P1 120 000 c. P800 000

b. P1 080 000 d. P360 000

51. Estimated liability from warranty

a. P1 920 000 c. P800 000

b. P1 080 000 d. P740 000

52. Premium expense

a. P1 836 000 c. P756 000

b. P 840 000 d. P450 000

53. Inventory of premium CD players

a. P399 500 c. P1 812 500

b. P569 500 d. P 739 500

54. Estimated premium claims outstanding

a. P308 000 c. P756 000

b. P364 000 d. P672 000

PROBLEM NO.8 In your initial audit of RMV Finance Company, you

find the following ledger account balances:
12%, 25-year bonds payable, 2004 issue
01/01/2004 CR P1 600 000

Treasury bonds
10/01/2008 CD P216 000

Bond premium
01/01/2004 CR P 80 000

Bond interest expense

01/01/2008 CD P 96 000

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 07/01/2008 CD P96 000
The bonds were redeemed for permanent cancellation on October 1,
2008 at 105 plus accrued interest.

Based on the above and the result of your audit, answer the
following (use straight-line amortization):
35. the adjusted balance of bonds payable as of December 31,
2008:
a. P1 400 000 c. P1 600 000
b. P1 000 000 d. P1 384 000

36. the unamortized bond premium on December 31, 2008:

a. P80 000 c. P64 000
b. P56 000 d. P58 800

37. the total bond interest expense for the year 2008 is:
a. P189 100 c. P182 900
b. P188 800 d. P182 800

38. the gain or loss on partial bond redemption is:

a. P 1 900 loss c. P 1 900 gain
b. P18 100 loss d. P18 100 gain

39. during the course of an audit, the auditor observes that the
recorded interest expense seems excessive in relation to the
balance in long-term debt. This observation could lead the
auditor to suspect that:
a. long-term debt is understated.
b. long-term debt is overstated.
c. Premium on bonds payable is understated
d. Discount bonds payable is overstated

PROBLEM NO.9 Trios Rivieres Ltd prepares the following lease

payments schedule for the lease of machine from Quebec Ltd. The
machine has an economic life of six years. The lease agreement
requires four annual payments of P33 000 and the machine will be
returned back to Quebec Ltd. At the end of the lease term. The
lease payments schedule is:
date MLP Interest Reduction in Balance of
expense liability FLL
7/1/09 P98 512
7/1/10 P30 000 P 9 851 P20 149 78 363
7/1/11 30 000 7 836 22 164 56 199
7/1/12 30 000 5 620 24 380 31 819
7/1/13 35 000 3 181 31 819 -
P125 000 P26 488 P98 512
Questions:
40. In its notes to the accounts at 30 June 2011, Trois Rivieres
Ltd. Would disclose lease payments of what amount?
a. P95 000 c. P 99 000
b. P65 000 d. P104 000

41. For the year ended June 30 2010, what would Trois Rivieres
Ltd record in relation to the lease?

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a. an interest expense of P20 419 c. an interest payable of
P9 851
b. an interest expense of P 0 d. an interest payable of
P7 836

42. How much annual depreciation expense would the entity record?
a. P24 628 c. P16 419
b. P15 585 d. P23 378

43. If Quebec records a lease receivable of P102 327, the

variance between receivable and the liability of P98 512 recorded
by Trois could be due to what?
a. initial direct costs paid by Quebec c. both a and b
b. Unguaranteed residual value d. neither of the above

44. Assume that 1 July 2010 lease payment included an additional

amount of P3 000 for exceeding a limit for machine hours
specified in the lease agreement. Trois would account for this
charge recognizing it as what?
a. an expense and disclosing the amount in the notes, if
material.
b. additional executory costs
c. revenue
d. a reduction in the lease liability
PROBLEM NO.10 Celtics Corporation manufactures television
components and sells them with 6-months warranty under which
defective components will be replaced without charge. On December
31, 2007, Estimated liability for Product Warranty had a balance
of P765 000. By June 30, 2008, this balance has been reduced to
P120 375 by debits for estimated cost of components returned.

The company started out in 2008 expecting 8% of the peso volume

of sales to be returned. However, due to the introduction of new
models during the year, this estimated percentage of returns was
increased to 10% on May 1. It is assumed that no components sold
during a given month are returned in that month. Each component
is stamped with a date at time of sale so that the warranty may
be properly administered. The following table of percentages
indicates the like pattern of sales return during the 6-month
period of the warranty, starting with the month following the
sale of components.

Month following sale % of total returns

expected
First 20
Second 30
Third 20
Fourth through sixth-10% each month 30

Gross sale of components were as follows for the first 6 months

of 2008:
Month Amount Month amount
January P5 400 000 April P4 275 000
February 4 950 000 May 3 000 000
march 6 150 000 June 2 700 000

The company’s warranty also covers the payment of freight cost of

defective components returned and on the new components sent out

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as replacements. This freight cost runs approximately 10% of the
sales price of the components returned. The manufacturing cost of
the components is roughly 80% of the sales price, and the salvage
value of returned components averages 15% of their sales price.

Based on the above and the result of your audit, answer the
following:
45. the total estimated returns for the six-month period ended
June 30, 2008?
a. P2 332 500 c. P2 118 000
b. P2 382 750 d. P2 232 000

46. the warranty expense for the six-month period ended June 30,
2008?
a. P1 985 625 c. P1 674 000
b. P2 057 400 d. P1 588 500

47. the Estimated Liability for Product Warranty as of June 30,

2008 should have a balance of:
a. P956 400 c. P795 938
b. P713 250 d. P636 750

48. the adjusting entry on June 30, 2008 will include a debit to
Warranty Expense of:
a. P592 875 c. P675 563
b. P740 385 d. P513 375

49. In evaluating the assumptions on which the estimate is based,

the auditor would need to pay particular assumptions which are:
a. reasonable in light of actual results in prior periods
b. consistent with those used for other accounting estimates
c. consistent with management’s plans which appear appropriate
d. subjective or susceptible to material misstatement

PROBLEM NO.11 On January 2, 2007, the Lakers, Inc. issued P4 000

000 of 8% convertible bonds at par. The bonds will mature on
January 1, 2011 and interest is payable annually every January 1.
The bond contract entitles the bondholders to receive 6 100 par
value, ordinary shares in exchange for each 1 P1 000 bond. On the
date of issue, the prevailing market interest rate for similar
dent without the conversion option is 10%.

On December 31, 2008, the holders of the bonds with total face
value of P2 000 000 exercised their conversion option. In
addition, the company reacquired at 110 bonds with a face value
of P1 000 000.

Based on the above and the result of your audit, answer the
following:
50. How much of the proceeds from the issuance of convertible
bonds should be allocated to equity?
a. P1 268 000 c. P443 328
b. P 253 632 d. P 0

51. how much is the carrying amount of the bonds payable as of

12/31/08?

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a. P4 000 000 c. P2 778 800
b. P3 592 340 d. P3 801 000

52. how much is the interest expense for the year 2008?
a. P320 000 c. P277 800
b. P359 234 d. P380 100

53. the conversion of the bonds on December 31, 2008 will

increase the share premium by:
a. P730 553 c. P800 000
b. P615 786 d. P 0

54. how much is the loss on bond reacquisition on December 31,

2008?
a. P100 000 c. P134 724
b. P192 106 d. P 0

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